DR. ALEX WHITE, VIRGINIA TECH DAIRY SCIENCE
Who do I rely on when creating a farm transition plan?
Do you have a “go-to person” for advice? Children often rely on their parents or grandparents, and adults often rely on certain friends. Students often rely on Wikipedia, Google, or YouTube. Farmers often rely on their accountant for advice about everything related to the business.
Relying on only one source of information may not be the best idea when it comes to transition planning. There are many issues related to transition planning that need to be discussed and analyzed: taxes, liability, ease of transfer, management control, communication, cash flow and profitability, etc. You need to develop a transition planning team so that nothing major slips through the cracks.
So, who should you consider for your transition planning team?
Teammates that you might consider
They are great sources of information on income taxes for different forms of legal organization (LLC, S-corp, etc.) and retirement plans, as well as the estate tax implications of gifts and trusts. Work with an accountant who understands your goals, your business, and your industry. You definitely need the assistance of a qualified accountant!
Attorneys can guide you on the legal and liability exposure of different forms of organization. They can discuss the “mechanics” of various estate planning tools such as wills, powers of attorney (POA), advance medical directives (AMD), gifting strategies, and trusts. They can advise you on buy/sell agreements and operating statements for your business. Not all attorneys specialize in estate planning or business planning – choose an attorney who can provide guidance in these areas in a manner that you understand.
Dollar signs tend to either confuse or intimidate a lot of people. Having a team member who understands, and can explain, the financial implications of your options can make your life a lot easier. Understanding your current and projected financial condition – liquidity, solvency, financial efficiency, profitability, and repayment ability – as well as the advantages/disadvantages of financial products will allow you to make better business decisions. Again, work with a lender and financial planner who understands your goals, your family, and your industry.
Insurance can be a powerful tool in transition planning, but too often it is used as a substitute for planning. “Just buy this insurance policy and use it to pay your estate taxes or transfer your business…” I cringe when I hear this statement! Insurance is a tool, and like any tool, it has its proper uses and its “not-so-proper” uses. It can be used to fund buy/sell agreements to purchase the decedent’s share of the business, or it can be used to pass the farm along to the “on-farm child” – the child that gets the farm assets while the “non-farm children” get the life insurance proceeds. Or it can be used for end-of-life medical expenses, as well as final expenses. Work with an insurance agent who has experience in estate planning and business planning.
Other Business Consultants:
Some of the most influential people in the agricultural arena are veterinarians, Extension agents, and crop consultants. Consider having at least one other business consultant on your transition team. This person can provide an objective look at your business and make recommendations for improving it so that it can support the next generation as you slowly phase out of the operation. If that person has also gone through or witnessed a few family-business transitions, that’s even better!
"Get the people who can provide you with the advice and guidance you need"
You probably want to include your current business partners and your future business partners on your team. After all, chances are you’ll be working with them. In many cases, you’ll at least be related to them! It’s best to get the communication between the partners started as early as possible. Too often, the older generation decides to retain control and not coach/mentor the next generation after the transition becomes “official.” Communication amongst partners is critical, as are the relations between the families of business partners.
Your spouse or significant other probably has a huge impact on your business decisions. Don’t ignore them in this process, as they are crucial to the success of your transition plan. What about other family members, such as the “non-farm kids” or the in-laws? This gets a little tricky, but I’m going to advise you to include them in the process. Do they have to be involved in every business decision or every meeting? No. But I would invite them to be a part of the process as appropriate. You are probably better off giving them the option to be involved versus keeping them out of the process all together.
Let’s face it, there are natural reasons why family communication is limited. That’s why an outside mediator might be a valuable part of your team. This person can get the family members to open up and communicate more clearly. They can ask the tough questions that family members want to ask, but don’t really know how to ask. They can bring up topics that might be tough for the family to face. If a family member were to try to do this, it could divide the family forever. If an outsider (the mediator) does it, the family can hate them for the rest of their lives, but the family should still be intact.
Your Transition Planning Team will provide guidance that can
- Reduce your income tax liability
- Improve the financial condition of your farm
- Reduce or avoid estate taxes
- Protect you, your family, and your net worth from liability
- Help you prepare for your retirement
- Keep your family business in business (and successful)
- Keep your family together (and talking to each other)
The next big question is, “what will it cost me to have these folks on my transition team?” It will be different in every situation. Do some research for local professionals in your area, talk to them to see if they are interested and how they would like to be compensated for their services. In some cases, it may be on a per-hour basis. In others, it might be on a retainer basis. Regardless, get the people who can provide you with the advice and guidance you need.
Can you afford to have a transition team to guide you through your future? Maybe the better question is, “Can you afford NOT to have a transition team?”
If you’re ready to gather a team for your farm’s transition plan, Farm Credit can help. Give us a call at 888.339.3334 and we’ll provide valuable insight as your financial lender.
Dr. Alex White has taught a wide variety of college courses at Ohio State, NC State, Ferrum College, and Virginia Tech for the past 25 years. The courses he has taught include ag financial management, farm management, small business management, and several courses in person finance management. He has served as an extension agent and as an extension specialist (personal/farm financial management) for Virginia Cooperative Extension and has worked with Farm Credit in a variety of ways for the past nine years. He also happens to be a Farm Credit customer.